Traders on the Exchange
Traders on the Exchange

Exchanges

There are many types of commodity traded in the world and the same goes for places where these commodities are traded. There are a lot of different exchanges or markets in the world that are often specialized in one or more specific commodites. On these exchanges, futures contracts, which give access to underlying commodities, are traded. These futures are traded by traders on the floor. An exchange arranges for a centralized area in which to trade in a responsible manner and are usually regulated by a national regulatory agency. An exchange has a number of tools at its disposal to control trading.

 

Trading Methods

When trading is on an exchange there are two ways to buy or sell a contract.
The first way is by using open out-cry in a trading pit. A trading pit is usually a raised octagonal platform, where traders trade contracts. This trading is done by using hand signals and shouting between traders. This form of trading is however being used less frequently and many exchanges are now only using electronic trading. This form of trading excludes the need for traders to physically meet for completing a trade. This way, traders can easily trade on a number of different exchanges from a single location. Electronic trading uses specialized software, which can differ per exchange. The advantage of electronic trading is the possibility to trade around the clock. With open out-cry trading, traders are bound to the designated trading hours.


Trailer for the documentary “The Pit”, describing trading on the exchange.

 

Clearing Houses

Each exchange has its own clearing house. A clearing house is an institution which clears transactions between two trading parties with the intention of providing a form of security between traders. Every member trading on an exchange is required to clear all of their trades at the end of a trading session. This means that all transactions, both bought and sold, are offset. Based on this result a margin is required to cover potential losses because of price fluctuations. A margin is a percentage of the total price of the trade. Therefore a part of the risk is covered by the clearing house itself. In the case prices of futures contract rise or drop the initial margin can be adjusted to match the current price, this type of margin is called maintenance margin. Clearing houses use this margin to maintain a sufficient deposit. Along with margining and maintaining enough margin per trader, clearing houses fulfill other services for traders at an exchange. In the case of a failure of one of the parties to honor its obligations, a clearing house will handle the further completion of a contract. To exclude this risk it is important for clearing houses to monitor the credit worthiness of traders or firms.

 

Important Exchanges

As mentioned before, exchanges specialize in different commodities. Although most commodities can be traded on an exchange, many exchanges hold a benchmark position on prices for a specific commodity.
 
Chicago Board Of Trades(CBOT) = this is the oldest futures exchange in the world focusing mainly on the trade of grain. Trade takes place by both open out-cry as well as electronic trading.
 
Chicago Mercantile Exchange (CME) = this is another major exchange located in Chicago. This exchange trades many types of agricultural products, such as meat, dairy and lumber.
 
New York Mercantile Exchange (NYMEX) = this is the largest physical commodity exchange in the world. It is actually a combination of the NYMEX and the Commodity Exchange, Inc (COMEX). On these exchange all types of energy commodities are traded as well as a number of metals such as gold, silver, copper and aluminum. This is the main exchange for trading energy commodities such as crude oil, natural gas and coal.
 
London Metal Exchange (LME) = this futures exchange focuses its trade on the different type of metal commodities. The prices set for metals on this exchange serve as a benchmark for over the counter trade in metals.
 
Lately new online exchanges appeared, for example for crypto currencies such as bitcoins. Deribit for futures and options on bitcoins can be seen as an authority: https://www.deribit.com/

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